Now It's Japan's Turn to Play Catch-Up

By ANDREW POLLACK

Published: November 21, 1993

LAST month, Takenori Kanzaki, head of Japan's Ministry of Posts and Telecommunications, summoned top executives from about 100 communications companies to an early morning meeting and showed them a videotape prepared by his agency.

The tape opened with President Clinton and Vice President Gore in Silicon Valley, talking about plans for the so-called information superhighway. It then showed American scientists working on an interactive television project. There were glimpses as well
of the installation of optical fibers to increase capacity of an American cable TV system and of an American service that delivers personalized electronic newspapers to computer users. "America is again aiming
to gain world leadership with the superhighway plan," the narrator intoned.

A few years ago, such a scare tactic might have been used in the United States to warn of Japan's impending conquest of some new market. But when it comes to advanced telecommunications, it is Japan that is now waking up to the fact that it is far
behind the United States, at a great risk to its economy. And Mr. Kanzaki's ministry, far from being the solution, is blamed by many experts for being part of the problem, having overregulated Japan's
telecommunications industry and smothered innovation.

In the United States, for instance, the use of electronic mail and computer networks is exploding, providing a new forum for commerce, speeding corporate decision-making and allowing scientists to swap data.

But in many Japanese offices, papers are still piled high and the number of personal computers per 100 workers (just 9.9) is only one-fourth that of the United States. Of the PC's that are there, only 13.4 percent can communicate with other computers
within a company, through so-called local area networks, compared with 55.7 percent in the United States. And California alone has six times as many computers connected to the Internet, the worldwide network that
is growing like a weed, as all of Japan.

"We are almost 10 years behind the United States" in networking, said Tateo Arimoto, an official of the Science and Technology Agency. Other Big Gaps

In the United States, cable television is evolving into a conduit for hundreds of channels, video on demand and two-way educational programming, among other things.

But in Japan, fewer than 3 percent of households receive cable programming compared with 60 percent in the United States. And while American cable companies like Tele-Communications Inc. and Time Warner Inc. are strong and busy forging alliances, Japan's
cable companies remain small and for the most part are too unsophisticated even to provide pay-per-view services.

And in the United States, wireless communications are beginning to stretch the boundaries of the office, allowing people to stay in touch from anywhere, anytime. But in Japan the relative number of users of cellular phones is less than one-third of that
in the United States. And there is little of the entrepreneurial activity found in the United States aimed at wireless transmission of data.

Developing its own information infrastructure is vital to Japan for several reasons. For one, new services like interactive television or huge computerized data bases can be big businesses in and of themselves.

Moreover, advanced communications can improve the productivity of existing businesses or assist in scientific research. Gobs of data from satellites studying the earth remain unusable by many scientists in Japan for lack of a high-speed network to deliver
the information, said Hiroshi Mizuta of the National Space Development Agency.

Japan's lack of sophisticated networks could also threaten its world-leading electronics companies. With their home market underdeveloped, such companies will have to design their most advanced portable phones, video equipment and telephone switches
for use abroad, which is a little more difficult.

For the same reason, Japanese companies missed the market for machines known as routers, electronic "traffic cops" used to connect smaller computer networks into bigger ones. A future product they might trail in -- unless they work with American
companies -- is the cable converter that could well control the flow of information into the home. The Missing Link

Indeed, electronic distribution of video, games, music and computer data could be a competitive threat to Japanese hardware, such as video- game machines, CD-ROM players and videocassette recorders. Japanese companies like Sony and Matsushita, which have
already expanded beyond hardware to software, or programming, through purchases of Hollywood movie studios, now must ponder whether they are still missing a link -- distribution.

Both Sony and Matsushita have talked recently with John Malone, head of T.C.I. He is said to be interested in purchasing a stake in one of their movie studios, which would give one of them a tie-up in the cable business. A Sony executive said the company
is interested in cable. But Tsuzo Murase, executive vice president of Matsushita, said his company is not interested in buying into cable nor in selling its studio, MCA Inc.

One reason Japan is lagging, particularly in computer communications, is cultural. Typing Japanese is difficult, making personal computers less convenient than sending handwritten messages on fax machines.

The Japanese also value face-to-face communications. Ikuo Nishioka, who became the head of the Intel Corporation's Japanese subsidiary a year or so ago after a career at the Sharp Corporation, said he was "astonished" at Intel's use
of electronic mail. When he completed his orientation visit to Intel's headquarters in Santa Clara, Calif., he said goodbye to other executives instantly by sending them messages. "In Japan," he said,
"it would take two weeks to say goodbye," by arranging appointments.

At the International Superconductivity Technology Center, a Government-backed research lab here, the cultural problem is of another sort. The laboratory's director forbids the use of electronic mail, afraid that confidential information will leak
out.

Other problems include the fact that it costs 5 to 10 times as much to lease a data line here as it does in the United States, said Izumi Aizu of the Tokyo-based Center for Global Communications. And Tokyo has been reluctant to support the Internet because
it does not use a communications standard the Government has been backing. Biggest Problem

That is indicative of the biggest problem, many experts say: The Ministry of Posts and Telecommunications has ruled over the industry with a heavy hand and has been slow to authorize new services. Such tight regulation might have helped protect Japan's
market from foreign competition, but it has also stifled the innovation spurred by the more open market in the United States.

A few years ago, for instance, the American Telephone and Telegraph Company tried to introduce a service here that would allow consumers to use a computer modem while talking on the phone. But regulation was so strict the company gave up.

"What's lagging is not the technology," said Roger Moore, president of the Japanese operations of Canada's Northern Telecom Ltd. "What's lagging has been more the changes in the competitive environment."

Japanese companies, after all, are among the leading manufacturers of cellular telephones. The Nippon Telegraph and Telephone Corporation, Japan's main phone company, and competitors like the DDI Corporation are making good progress on newer digital
cellular service and the next generation of mobile phone service.

But because of Government regulation, rates for cellular phone service in Japan are among the highest in the world and customers must rent their phones from the service supplier, paying about $600 a year for a phone that could be purchased for half that
amount in the United States.

Cable television has suffered because the telecommunications ministry decided to back a still commercially unsuccessful effort to transmit television programs from satellites to homes. Cable was relegated to being a local service aimed mainly at improving
television reception. It was not until 1989 that satellites were used to distribute programs to cable systems, allowing for the development of nationwide cable programming services similar to MTV and Cable News
Network. And a controlling interest in a cable company can be held only by an investor based in that company's service area, a rule that will soon change but has left cable operators small and Balkanized.

"We don't have capital" in the industry, said Yasushige Nishimura, who is in charge of the cable business at the Sumitomo Corporation. "We don't have personnel resources. We don't have expertise." Government's View

Responding to criticism, Masaharu Matsumoto, deputy director of the cablecast division of the telecommunications ministry, said cable TV in Japan is less regulated than in the United States. Cable operators here, he said, do not pay franchise fees and
do not have ceilings on their rates.

To be sure, in terms of technology and deregulation of its telephone system, Japan is hardly in last place and is ahead of some European countries such as France and Germany. And much of the frenzy of industry activity in the United States, including
the recent rash of alliances, might not result in profitable businesses.

Japan also has a capacity to advance rapidly once it decides what it must do. And that dawning is now occurring. Earlier this month the Social and Economic Congress of Japan, a group that has the ear of the powerful Ministry of International Trade and
Industry, submitted an "emergency" proposal to the Government saying Japan is "decisively behind" in telecommunications and needs a program to catch up.

Already cable TV, computer network and cellular phone use has accelerated. And deregulation is gradually occurring, pushed by Prime Minister Morihiro Hosokawa. The rule requiring cellular subscribers to lease their phones will be gone by April, for instance.

Expertise is also being imported, giving American and European companies a chance to break into the Japanese market. Last week, the Nynex Corporation said it planned to build advanced cable systems in partnership with the Tomen Corporation, a trading
company. T.C.I. has taken a stake in a cable programming service controlled by Sumitomo. And N.T.T., to tap into American technology, made an investment this month in Nextel Communications, a mobile radio company.

The telecommunications ministry's showing of the Clinton-Gore video last month was meant to garner industry support for a pilot project in which optical fiber will be installed in 300 homes near Kyoto to test delivery of video on demand, video telephones
and other services.

But there is a debate here, as in the United States, about whether development of the information superhighway should be the role of Government or of industry. Within the Government, there is also a bitter war for control between the Ministry of Posts
and Telecommunications and the trade ministry.

N.T.T., which was privatized in 1985, says it can wire the entire country with optical fiber by itself by the year 2015. It is experimenting with new services like super high-definition television, which is twice as sharp as existing HDTV and would allow
medical images to be transmitted with enough clarity for diagnosis by doctors in other locations.

N.T.T. estimates that providing optical fiber to every home and business will cost $400 billion, an amount it says it can manage. But others have their doubts and there are reports the start of the fiber plan is being postponed. N.T.T.'s profits
have been decimated by competition in the long-distance business and by regulations that have held down local rates.

There are also doubts about whether such a high-capacity network can pay for itself. The telecommunications ministry must decide whether to allow N.T.T. to be in the video programming business. If it does not allow it, N.T.T. might never be able to make
the optical fibers pay off. But if it does, N.T.T. might crush some fledgling cable television companies.

In electronic mail, Japan's problems are not only Government regulation, but also lack of the Government's usual participation in industrial development. In a reversal of roles, Washington underwrote the development of research networks in the
United States while some frustrated scientists in Japan have had to hook up their own networks.

"Our Government doesn't understand the importance of internetworking yet," said Haruhisa Ishida, a professor in the computer center at the University of Tokyo.

To the extent Government agencies do have networks, they do not communicate with other agencies. A message from one to another might have to go through the United States. Plugging In

The Government is now planning to remedy that with an interagency network to connect 100 national research institutes, with eventual extensions to universities. But some scientists from industry and Government think that plan, which could cost about $40
million in the first three years, does not go far enough. They are suggesting a far more ambitious plan to allow researchers to use supercomputers through an extremely high-speed network. But this project, which
could cost at least $300 million, has not yet received approval.

In business, use of networking is also starting to spread. Tadashi Sekizawa, president of Fujitsu Ltd., travels with a pocket computer to check his electronic mail. Japanese affiliates of A.T.&T. and the Intercon Systems Corporation of Herndon, Va.,
have just begun offering companies here access to the Internet.

And Japanese counterparts of Compuserve and Prodigy, the personal computer services, are also gaining popularity. The two main services, NEC's PC-VAN and Fujitsu's Nifty-Serve, did not start until 1987. Now each has more than 500,000 subscribers.

"When we started this business," said Takashi Yamakawa, general manager of the planning department at Nifty-Serve, "we were afraid that Japanese were too shy to express their private opinions in public spaces like forums."

Now, the on-line forums are overloaded with messages, a sign that a networking culture might not be all that foreign to Japan after all. JAPAN'S MAVERICK MASTER OF THE INTERNET

JUN MURAI is the father of the Internet in Japan, a role that has brought him a measure of fame but not always made him popular with the establishment.

Dr. Murai, who teaches at Keio University, began trying to connect Japan's computers to the world in 1984. As a first step, he had to develop Japanese language ability for the software used to control the Internet, the worldwide network.

A ball of energy, Dr. Murai started JU-Net and WIDE, nonprofit networks that connect universities and tie them into the Internet. He is also on Internet's architecture board.

All this has made the 38-year-old computer scientist a revered guru. A company called Intercon International recently advertised that he would be the speaker at a news conference in which it would introduce a service to connect Japanese businesses to
the Internet. But Dr. Murai, who is known for having an overloaded appointment calendar, couldn't make it. "Some Japanese press didn't walk in the door when they saw Murai was not there," said
Intercon's president, Roger Boisvert.

Some scientists, however, feel Dr. Murai is too powerful and he has had his share of clashes with the Government. He has been an adviser to Internet Initiative Japan, a startup that is trying to provide Internet connectivity to businesses but has so far
failed to get a Government permit.

The WIDE network was developed with academic volunteers and corporate contributions, without waiting for the Government. Such a grass-roots effort has not always been appreciated by the Education Ministry, which is developing its own networks.

Dr. Murai said he has little patience with regulators. "Government people like to control things and I don't like to be controlled," he said.

Someday, Dr. Murai said, he would like to be a visiting scholar in the United States. "It's very interesting to see how people are using computers for their daily lives there, which is not happening in this country," he said.

Not surprisingly, computers play a big part in his daily life. His house is wired with a local area network so he can sit in his kitchen and connect to his computer room and by high-speed data lines to the world beyond. "My 8-year-old daughter communicates
with me by e-mail," he said proudly.

His ultimate goal: "I want to connect all the computers in this world." THE SHAKY SATELLITE GAMBIT

INSTEAD of cable television, Japan has placed its bets on broadcasting directly from satellites to homes. But the satellite business has had trouble getting airborne.

The Ministry of Posts and Telecommunications decided on using a type of satellite that had a powerful signal but could carry only a few channels. It reserved two of those channels for NHK, the state-controlled broadcasting company. To provide programming
for a third channel, the ministry in 1984 pooled investments of more than 200 companies into Japan Satellite Broadcasting under the leadership of a former ministry bureaucrat.

Today, Japan Satellite has only 1.4 million subscribers for its pay-television service, known as Wowow. That is less than half the 3 million needed to break even. Earlier this year Japan Satellite was rescued from financial straits by a group of banks
and the president was replaced.

It wasn't until a few years ago that the ministry liberalized the use of a different type of satellite, previously used in Japan mainly for phone service. These satellites have a less powerful signal but can transmit far more channels. New companies,
backed by Japan's giant trading companies, began using them to distribute cable programming. They are also starting to broadcast directly to homes in competition with the older satellites. But the two types
of satellites require different receiving equipment, fracturing the market and confusing consumers.